Securities and Exchange Board of India (“SEBI”) has come up with a Regulatory framework for Execution Only Platforms (“EOP”) for facilitating transactions in direct plans of schemes of Mutual Funds.
As per the SEBI Circular dated June 13, 2023 bearing reference number SEBI/HO/IMD/IMD-PoD-1/P/CIR/2023/86, no entity shall operate as an EOP without obtaining registration from SEBI or the Association of Mutual Funds in India (“AMFI”).
Any entity providing digital or online platform which facilitates transactions in direct plans of schemes of Mutual Funds, on or prior to this circular coming into force, shall apply for the registration/membership, as the case may be, within 3 months from the date of this circular coming into force i.e., September 01, 2023.
Any entity desirous of operating as an EOP shall obtain registration under one of the following two categories:
1. Category 1 EOPs: a. The entity shall obtain registration from AMFI. b. The entity shall be a body corporate. c. The entity shall act as an agent of Asset Management Companies (“AMCs”) and integrate its systems with AMCs and/or RTAs authorized by such AMCs, to facilitate transactions in Mutual Funds.
d. The entity may act as an aggregator of the transactions in direct plans of schemes of Mutual Funds and provide services to investors/other intermediaries.
2. Category 2 EOPs:
a. The entity shall obtain registration as a Stock Broker in terms of the SEBI (Stock Brokers) Regulations, 1992 under the EOP segment of the Stock Exchanges.
b. The entity shall be a body corporate.
c. The entity shall operate as an agent of the investor and operate only through the platforms provided by the Stock Exchanges.
d. The entity shall not act as an aggregator of the transactions in direct plans of schemes of Mutual Funds and shall provide services to investors directly.
On-boarding and integration:
1. The Category 2 EOPs:
a. shall comply with the Know Your Client (KYC) requirements at the time of onboarding investors on its platform and take necessary steps including verifying the identity of its investors by requiring them to submit necessary documents.
b. shall have access to the KYC data of the investors available with the KYC Registration Agencies for on-boarding of investors.
c. shall carry out due diligence and further ensure that investor signs a “Rights and Obligation” document as specified by Stock Exchanges before availing its services.
d. entity shall enter into an arrangement with the Stock Exchanges which should clearly define their rights and obligations relating to the EOP services.
2. The Category 1 EOPs,
a. requirement for onboarding investor shall be specified by AMFI.
b. the entity shall enter into the agreement(s) to be executed by the entity with the AMCs which clearly define their rights and obligations relating to EOP services. Further the entity shall have an objective, fair and transparent policy for providing execution services for products of AMC.
3. KYC requirements for both the categories of EOPs by investors in Mutual Funds, shall lie with the AMCs.
Transactions and onboarding fees
1. Category 1 EOPs: may levy flat transaction fee, which will be borne by the AMCs, within the upper limit set by AMFI. Onboarding fees, if levied, will be borne by the AMCs.
2. Category 2 EOPs: may levy flat transaction fee, which will be borne by the investors, within the upper limit specified by the stock exchanges. Onboarding fees, if applicable, will be borne by the AMCs and/or investors.
3. AMCs shall not charge any fees/charges paid to the EOPs, to the schemes of the Mutual Funds.
Operational Risk Management
1. The entities under both categories of EOPs shall:
a. have a comprehensive risk management framework.
b. have access control for their clients and prevent unauthorized access to their platform.
c. ensure that every transaction on their platform, without exception, are handled in a fair, non-discriminatory and orderly manner.
d. create data governance, protection and dissemination policy.
e. only allow transactions that are in compliance with the prevailing legal or regulatory requirements and shall establish appropriate controls to reduce the likelihood of erroneous transactions.
f. retain the data about their activities in an easily retrievable media. Additionally, keep all information pertaining to their activities private and secure, and closely regulate who has access to such information.
g. ensure data integrity and privacy.
h. develop the appropriate systems and written policies for the following:
i. onboarding investors onto their platform;
ii. transaction execution;
iii. rights and obligations/terms and conditions for investors and the EOP;
iv. risk management and control;
v. liability framework for the EOP in case of violation of the policies; and
vi. restrictions or other conditions that might be applicable for accessing the platform.
i. establish necessary systems and frame suitable policies, in writing, for onboarding of investors on their platform, execution of transactions, rights and obligations/terms and conditions for the investor and the EOP, risk management and control, liability framework for EOP in case of breach of the policies, restrictions or other requirements that may apply for accessing the platform.
2. The entities under both categories of EOPs may share investors’ data only with the specific consent of the investors.
3. Category 1 EOP, shall ensure compliance with cyber security and cyber resilience requirements, as specified by AMFI.
4. Category 2 EOP, shall ensure compliance with the cyber security and cyber resilience framework for Stock Brokers, as prescribed by SEBI from time to time
1. Category 1 EOPs - the grievance redressal mechanism shall be as prescribed by AMFI.
2. Category 2 EOPs - the grievance redressal mechanism shall be as prescribed for Stock Brokers from time to time.
Handing conflict of interest
The entities under both categories of EOPs shall ensure the following:
1. Maintain arm’s length relationship, if performing multiple activities within the same entity.
2. Maintain investor-level segregation at the group level of the entity between EOP services and distribution services for mutual fund products. As a result, an investor at the EOP's group may either utilise EOP services for dealing with direct plans or distribution services for Mutual Funds' standard plans.
a. For this purpose, the family of the investor shall be reckoned as a single investor. The definition of “group” shall have the same meaning as defined under SEBI (Investment Advisers) Regulations, 2013.
b. PAN shall be the control record for identification and investor level segregation at the entity’s end. In case of an individual investor, “family of investor” shall be reckoned as a single investor and PAN of all members in “family of investor” shall jointly and severally be the control record.
c. “Family of investor” includes individual investor, dependent spouse, dependent children and dependent parents. The dependent family members shall be those members whose investments through EOP originate from the income of a single entity i.e., earning individual investor in the family. The investor shall provide an annual declaration or periodic updation as the case may be in respect of such dependent family members.
3. Use SEBI/AMFI registration as an EOP, only for the purpose of providing execution only services in direct plans of Mutual Fund schemes and not use the said registration for undertaking any unregulated activity.
4. Undertake services regulated or permitted by other sectoral regulators, only with specific disclosure regarding such services not being covered under the ambit of entity’s registration as an EOP and also disclose the details of registration/permissions by other sectoral regulators in such cases.
5. Undertake to identify and disclose on their platform, possible conflict(s)of interest, if any, including those arising from their transactions or dealings with related parties.
Technology related requirements
1. Execution of transactions
a. Category 1 EOPs - The orders of investors placed shall be routed directly to the AMCs and/or RTAs authorized by such AMCs.
b. Category 2 EOPs - The orders of investors placed through shall be routed through the platforms provided by the Stock Exchanges.
c. The order of the investors placed through both categories of EOPs shall be executed on an immediate basis.
2. The entities under both categories of EOPs shall:
a. maintain robust technology infrastructure with a high degree of reliability, availability, scalability and security in respect of their systems, data and network, to appropriately support their operations and manage the associated risks.
b. Have adequate and suitable systems in place to disseminate information to investors pertaining to orders placed on a real-time or a near real-time basis.
c. Have the organizational capabilities, technology and systems and safeguards for maintaining data privacy and preventing unauthorized sharing of data.
d. establish appropriate safeguards and procedures to deal with exigencies including malfunctions or erroneous use of their systems, or other unforeseen situations.
e. make their platforms available for transactions at all times, on a continuous basis.
Disclosure related requirements:
1. Display of advertisements: The EOPs also cannot display any advertisement regarding any mutual fund scheme on their platforms. Further, they cannot display any proxy/surrogate/common brand-related advertisements;
2. Issuance of transaction receipt and alerts to the clients;
3. Access to transaction data;
4. Disclosures regarding Mutual Fund schemes.
Pooling of Funds:
The discontinuation of usage of pool accounts for transactions in units of mutual funds would also be applicable to EOPs.
Maintenance of books of accounts, records, etc.
1. Category 1 EOP - the books of account, records and documents, to be maintained, in the form and manner specified by AMFI.
2. Category 2 EOP - the books of account, records and documents, to be maintained, as may be specified by SEBI, for a minimum period of five years.
This circular shall come into force with effect from September 01, 2023.